When a company goes public though an initial public offering (IPO), an investment bank evaluates the company's current and projected performance and health to determine the value of the IPO for the business. The bank can do this by comparing the company with the IPO of another similar company, or by calculating the net present value of the firm. The company and the investment bank will meet with investors to help determine the best IPO price through a series of road shows. Finally, after the valuation and road shows, the firm must meet with the exchange, which will determine if the IPO price is fair.

Once trading starts, share prices are largely determined by the forces of supply and demand. A company that demonstrates long-term earnings potential may attract more buyers, thereby enjoying an increase in share prices. A company with a poor outlook, on the other hand, may attract more sellers than buyers, which can result in lower prices. In general, prices rise during periods of increased demand - when there are more buyers than sellers. Prices fall during periods of increased supply - when there are more sellers than buyers. A continuous rise in prices is known as an uptrend, and a continuous drop in prices in called a downtrend. Sustained uptrends form a "bull" market and sustained downtrends are called "bear" markets.

Other factors can affect prices and cause sudden or temporary changes in price. Some examples of this include earnings reports, political events, financial reports and economic news. Not all news or reports affect all securities. For example, the stocks of companies engaged in the gas and oil industry may react to the weekly petroleum status report from the U.S. Energy Information Administration (the "EIA report").

Stock prices can also be driven by what is known as herd instinct, which is the tendency for people to mimic the action of a larger group. For example, as more and more people buy a stock, pushing the price higher and higher, other people will jump on board, assuming that all the other investors must be right (or that they know something not everyone else knows). There may be no fundamental or technical support for the price increase, yet investors continue to buy because others are doing so and they are afraid of missing out. This is one of many phenomena studied under the umbrella of behavioral finance.

  1. When did Facebook go public?

    Facebook, Inc. (NASDAQ: FB) went public with its initial public offering (IPO) on May 18, 2012. With a peak market capitalization ... Read Full Answer >>
  2. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does investment banking differ from commercial banking?

    Investment banking and commercial banking are two primary segments of the banking industry. Investment banks facilitate the ... Read Full Answer >>
  5. What kind of assets can be traded on a secondary market?

    Virtually all types of financial assets and investing instruments are traded on secondary markets, including stocks, bonds, ... Read Full Answer >>
  6. Why would a company decide to utilize H-shares over A-shares in its IPO?

    A company would decide to utilize H shares over A shares in its initial public offering (IPO) if that company believes it ... Read Full Answer >>
Related Articles
  1. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  2. Stock Analysis

    Match.com IPO: Is it a 'Buy' or Should You Pass?

    Demand for relationships is always high. Now you will have a way to directly invest in the relationship market. But is it priced fairly?
  3. Fundamental Analysis

    Investment Banks: Not a Good Bet Right Now?

    Investment banks might appear safe to investors at the moment, but they're probably more dangerous than advertised.
  4. Options & Futures

    Terrorism's Effects on Wall Street

    Terrorist activity tends to have a negative impact on the markets, but just how much? Find out how to take cover.
  5. Professionals

    Common Interview Questions for Investment Bankers

    Explore some of the most commonly asked questions in an interview for an investment banking position, along with suggestions for winning answers.
  6. Stock Analysis

    Toys 'R' Us Stock Doesn’t Exist: Here is Why

    Learn why investors cannot trade stock in toy retailer Toys 'R' Us. This privately traded company could be a hot IPO candidate for the future.
  7. Investing

    Deutsche Bank Undergoes a Significant Revamp

    The Deutsche Bank's reorganization is being called one of the biggest shake-ups at an investment bank in recent years.
  8. Stock Analysis

    Goldman Sachs Vs. Morgan Stanley: Comparing Business Models

    Take a closer look into the most noted rivalry on Wall Street between Morgan Stanley and Goldman Sachs, the last two standalone investment banks.
  9. Stock Analysis

    If You Had Invested in Qualcomm Right After Its IPO

    Find out about how much you would have if you had bought 100 shares of Qualcomm during its initial public offering and the amount you would receive in dividends.
  10. Markets

    Why Are Companies Taking Longer To Go Public?

    Learn why private companies are waiting longer to have their IPOs. Understand why it may be more advantageous for a company to stay private.
  1. Futures Market

    An auction market in which participants buy and sell commodity/future ...
  2. Investment Banking

    A specific division of banking related to the creation of capital ...
  3. Capital Markets

    Capital markets are markets for buying and selling equity and ...
  4. Equity Market

    The market in which shares are issued and traded, either through ...
  5. Investment Banker

    Someone working at an institution raising capital for companies, ...
  6. Lloyds Organizations

    An insurance syndicate that bases its organizational structure ...

You May Also Like

Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center